Question

Suppose you work for Kellogg's breakfast cereal division. Your job to estimate demand for Kellogg's breakfast cereals. Explain how you can use the different elasticities to the impact the price of the cereal, prices of subsitutes and complements, and consumer income will have on the demand for Kellogg's cereals. Don't forget to include your assumptions.

Answer 1

a) Elastic is the case where the percentage change in demand is more than the percentage change in price whereas inelastic is the case where the percentage change in quantity is less than percentage change in the price which means demand does not change much with the change in the price.

Suppose the demand for Kellog's breakfast cereal is elastic then in this case,raising the price will cause the demand for cereal to fall which will lead to fall in total revenue.

On the other and if the demand for the breakfast is inelastic,then an increase in price will cause the demand to not change that much and in this case total revenue will increase.

b) When the price of the substitutes increases then the demand for kellog's cereal will increase as it would be cheaper to buy in comparison to its substitute.

Ont the other hand when the price of the substitutes falls then the demand for Kellog's cereal will decrease as it will be more costly in comparison to its substitute.

c) Assuming Kellog's cereal to be a normal good,when the income of the consumer rises,their demand for the cereal will increase and if their income decreases then the demand for cereal will fall.

On the other hand,assuming cereal to be an inferior good,when the income of the consumer increases,their demand for cereal will fall and when their income decreases their demand for the cereal will increase.